Accounting Ethics Paper 1

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Ethics Essay/Case Assignment

1)a. Explain and describe characteristics of an effective system of internal control. An effective system of internal control limits the probability that fraud will take place. Within an effective system on internal control an organization will safeguard their assets, encourage employees to follow company policy, promote operational efficiency, strive towards the most accurate and reliable accounting records, and complies with all legal requirements. Internal controls not only helps to eliminate fraud but also waste and inefficiency. There are five components that are used to break down internal control. The first is control environment which is at the top such as the managers and CEO’s of companies which need to set good examples and have a corporate code of ethics for larger companies. Second is risk assessment where an organization will identify its business risks and do what they can to avoid causing financial harm to the company, its workers, owners, and creditors. Third is an information system where accounting is recorded and information needs to be accurate and recoded in a timely fashion. Fourth is control procedure which takes into account duties being separate to protect against theft. Lastly is the monitoring of controls which monitors to make sure no individual or special group

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of people can process transaction from start to finish without being cross checked by others. b. Explain why separation of duties is often described as the cornerstone of internal control for safeguarding assets. Describe what can happen if the same person has custody of an asset and also accounts for the asset.

Separation of duties is often described as the cornerstone of internal control for safeguarding assets because if one person of a small group of people have total control over transaction from the beginning to the end they can manipulate the books and steal from the organization. For example, if one individual collects checks for an internet DVD business and also accounts for those checks then they can mark the account as paid and then endorse the check to their account while at the same time showing that the money has been accounted for and deposited in the bank by using the lapping method and covering up the shortage by applying collections received later from another customer. You can see how this can be very dangerous to leave people in control of too much of the duties when money is involved.

2) Learning about fraud; making an ethical judgment related to internal controls. Gretchen Rourke, an accountant for Dublin Limited, discovers that her supervisor, Billy Dunn, made several errors last year. In total, the errors overstated the company’s net income by 25%. It is not clear whether the errors were deliberate or accidental. What should Rourke do?

Rourke should immediately confront Dunn in a calm and collected fashion and show Dunn where she sees the errors. She should then work with Dunn to correct the errors and pass the information onto the controller if applicable and necessary in the 3

scenario. If Dunn is not willing to make the appropriate changes or cannot show Rourke where her calculations are incorrect then Rourke should immediately go to Dunn’s superior to handle the issue as Rourke would not only be doing the right thing but could be held accountable knowing the information provided on the accounting records is not correct and has been overstated by 25%. Unfortunately, if Rourke is a CEO or head of the company it would put you in a really tough spot and the best thing might be to resign or release the information to the appropriate authorities.

3) Learning about fraud; correcting an internal control weakness: Bobby Flynn served as executive director of Downtown Kalamazoo, an organization created to revitalize Kalamazoo, Michigan. Over the course of 13 years Flynn embezzled $333,000. How did Flynn do it? By depositing subscriber cash...
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